The amount of monthly retirement benefits a retired worker receives, or their “primary insurance amount”, depends on their work history, the date they became eligible for retirement, and their age at retirement. Specifically, Social Security Administration will apply the “primary insurance formula” to someone’s “average indexed monthly earnings”, then make necessary modifications due to early or late retirement to determine the retired worker’s total monthly retirement benefits. Fortunately, it’s a fairly mechanical process, so it can be broken into much more understandable steps without learning all of the technical terms.
First, Social Security will determine your average indexed monthly earnings, beginning two years prior to the year in which you become eligible for retirement. (“Indexing” is a process that controls for rising cost of living and lower past wages, but for the purpose of this explanation, you can view this as simple average monthly earnings). Retired workers are eligible to receive up to 90% of the first $1,115 of their average indexed monthly earnings as benefits. They are also eligible to receive 32% of their average indexed monthly earnings above $1,115 but below $6,721, and 15% of their average indexed monthly earnings above $6,721. (This methodical application of percentages and thresholds is known as the “primary insurance amount formula”, and it is important to note that, while the percentages themselves do not change, the actual dollar value thresholds are updated every year to adjust for inflation).
Next, Social Security determines if a reduction or increase applies due to early or late retirement. Workers become eligible for retirement at age 62. However, their benefits are reduced if they retire before “normal retirement age”, and they could be increased if they do not retire until after normal retirement age. (“Normal retirement age” is 67 for anyone born January 2, 1960 or later, but a specific table can be found on Social Security Administration’s website). If someone applies for retirement before their normal retirement age, their benefits will be reduced by 5/9 of one percent for each month before normal retirement age, up to 36 months. If they are more than 36 months away from attaining normal retirement age, their benefits are further reduced by 5/12 of one percent for each month beyond 36 months. (i.e. 5/9 for the first 36 months, and then 5/12 for each month after, resulting in a maximum reduction of 30% at age 62).
Finally, individuals can also earn additional credits (meaning “increase their retirement benefits”) by retiring after their normal retirement age. These credits are worth a specific percentage of benefits, though the actual percentage varies by birth year. (For those born in 1943 or later, it is 8% per year.) These credits can be earned until age 69, meaning a maximum of three credits could be applied to your monthly benefit.
By: Devon Brady of Premier Disability Services, LLC®